Feb/Mar 2008

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A development economist poses a counterhistory of free trade

James Surowiecki

In the 1980s, as developing countries across the world struggled with crushing debt burdens and slow-growing economies, they were pushed—by the United States and international financial institutions—to embrace a set of policies that promised to rescue them. These policies, which are often grouped under the label neoliberalism, proceeded from the assumption that developing countries interfered too much with the workings of their markets. Instead, countries needed to lower tariffs and embrace free trade, privatize state-owned industries, end subsidies to businesses and consumers, balance their budgets, and be friendlier to foreign investment. If a country got its financial house in order and let the free market work its magic, in other words, it had a good chance of watching its economy boom.

But neoliberalism turned out not to be the panacea its advocates promised. Even as developing countries opened up their markets, sold off assets, and cut back on spending, their economies for the most part stagnated. In fact, over the past twenty-five years, growth rates in most of the developing world have been lower than they were during the 1960s and '70s, when state interventionism was in economic vogue. And while there have been some massive success stories in recent decades—most obviously China and India—the gap in wealth between the developed world and most developing countries has actually widened. Plenty of explanations have been given for neoliberalism's failure, including the persistence of corruption, the importance of culture, and the simple failure on the part of many countries to follow the neoliberal agenda completely. But in his new book, Bad Samaritans, the Cambridge economist Ha-Joon Chang offers a more succinct solution to the puzzle: Neoliberalism didn't work because the advice it gave made no sense. In thrall to the "myth of free trade," Chang argues, neoliberals ignored the "secret history of capitalism": If developing countries' embrace of the free market has failed to deliver what it promised, it's because "free markets are not good at promoting economic development."

This is, to say the least, a conclusion that most economists would find less than credible, at least in such a blunt formulation. But Chang sets out to prove it not theoretically but empirically, by retelling the history of economic development. As he sees it, the dominant economic powers of the past two centuries—Great Britain and the United States—succeeded not because they let the free market reign but because they didn't. The US, from the days of Alexander Hamilton, used tariffs to protect "infant industries"—by keeping prices on imports high, the tariffs made domestic products more attractive, giving domestic producers a chance to develop. Great Britain, meanwhile, did adopt a policy of almost unrestricted trade in the mid-nineteenth century, but Chang argues that it did so only after using tight restrictions on imports to become the world's leading industrial power.

President Grover Cleveland, in an 1894 cartoon, as captain of the ship Democracy, using his veto power and Republican allies to quell congressmen of his own party rebelling against his silver-purchase, civil-service, and tariff reforms.

In the twentieth century, meanwhile, most of the great economic success stories—including Japan and the so-called Asian Tigers, like Taiwan and South Korea—limited imports and foreign investment, subsidized new industries to get them off the ground, and generally violated most of the rules of neoliberalism. Yet their economies grew at enormously fast paces, turning them in just a couple of a generations from underdeveloped backwaters into prosperous, bourgeois societies. Even those countries that have failed to make much headway against poverty, including most of Latin America and Africa, generally grew faster when their governments took active roles in restricting and guiding the market. What history tells us, in other words, is that free trade and free markets are more of a bane to developing countries than a boon. And those rich countries that insist poorer ones follow neoliberal prescriptions are hypocrites, insisting on solutions they themselves did not follow.

Chang isn't advocating socialism, exactly—although he does offer up a long defense of state owner­ship of enterprises. What he's pushing instead are aggressive government policies designed to protect and nurture domestic manufacturers, allowing countries to ascend the technological ladder so that they can eventually compete with wealthier nations. Chang believes that private investors are impatient and unwilling to sacrifice present returns for future gains. As a result, they will not take risks on new industries in poor countries, at least not in the absence of some other advantage (like tariff protection or government subsidy). If governments create protective umbrellas—via tariffs, subsidies, loose intellectual-property rules, restrictions on imports, and the like—for domestic companies, though, those companies will have a chance over time to become globally competitive, raising the level of prosperity of the country as a whole. Chang acknowledges that these umbrellas have costs—they raise prices for consumers in developing countries and often cut off access to better and cheaper foreign goods—but those are outweighed by the future benefits.

Chang is certainly right that governments have an important role to play in fostering economic development. And much of his critique is the proverbial useful corrective to the pieties of neoliberalism and the overweening certainty that there is one true path to economic success. He also trenchantly attacks the developed world's insistence on absurdly strict intellectual-property rules (rules that the United States willfully circumvented when it was a developing nation) and rightly points out that government ownership—in the context of a generally free-market economy—is hardly the automatic disaster that privatization advocates insist it will be.

At the same time, though, Bad Samaritans is not ultimately convincing, particularly when it comes to the solutions it proffers. In part, that's because Chang's definition of what matters in an economy is strangely narrow, focused almost entirely on some Platonic notion of the "nation" rather than on the people who actually live in it. There are few businessmen, few workers, and almost no consumers in Bad Samaritans: Individuals appear mainly as factors in a nation's productive enterprises. Now, in one respect, this is not surprising: Macroeconomists write about macroeconomies, and the nation-state remains, even in the age of globalization, a fundamental economic unit. But Chang's resolutely statist vision of the world necessarily leads him to under­estimate the costs and overrate the benefits of protectionism.

What Chang does in Bad Samaritans is assume that the interests of the nation trump those of its citizens. Protectionism of the kind Chang advocates is bad for a country's consumers—they have to pay more for less, the quality and variety of what they can buy goes down, and so on. Yet Chang is essentially indifferent to this problem. He simply takes as a given that consumers should be willing to make themselves objectively worse off in the present in the hope that this will translate to greater success in the future, because that's what's in the best interests of the nation. And he seems strangely untroubled by the authoritarianism implicit in any powerfully protectionist regime—as he himself points out, in the heyday of protectionism in South Korea, people violating foreign-currency regulations were subject to the death penalty, while citizens were encouraged to report their neighbors for doing things like smoking foreign cigarettes. This doesn't make tariffs automatically a bad thing, but Chang seems not even to notice that having the government tell you whom you can buy from and sell to might actually be problematic.

The question of whether consumers' present interests should be sacrificed for the long-term benefit of producers is, of course, a normative one. But Bad Samaritans is also tendentious when it comes to the factual questions Chang claims to be answering. (It's also occasionally confused: Chang seems to believe that France lost World War I.) The book does an excellent job of showing that myriad countries have flourished while ignoring neoliberal prescriptions. What it doesn't show, though, is that these countries succeeded because they ignored them.

It's true, for instance, that the United States generally had high tariffs on manufacturing for most of the nineteenth century. But as Chang himself mentions, between 1846 and 1861, the US adopted historically low tariffs and yet saw no deceleration of its growth rate, which one would have expected if free trade were so damaging to developing countries. Germany, meanwhile, became an industrial power in the late nineteenth century while operating under a low-tariff regime, and two countries that Chang cites as paragons of manufacturing excellence—Switzerland and Singapore—have followed as close to a complete free-trade policy as possible. Meanwhile, along with all the state-interventionist success stories that Chang cites, there are many other countries that followed similar strategies and ended up in tears. Chang doesn't really account for why neoliberal orthodoxy became so powerful when it did. But one reason was that the third world was, in general, an economic mess by the end of the 1970s. That may not have been because of the state-interventionist policies so many developing countries had relied on, but it certainly needs to be taken into account.

The point isn't that the neoliberals were right—in their insistence that they knew the route to success and in their roughshod refusal to take politics and historical context seriously, they weren't. The point instead is that Chang is giving us a simple answer to the question "How do you make an economy grow?" when, at this point at least, no such answer exists. There have been innumerable studies, for instance, looking at the relationship between free trade and economic growth, and the only thing that's clear is that neither free trade nor protectionism is a cure-all. The problem of disentangling all the factors that go into a country's economic performance in order to isolate the ones that really count is a monumental task, and not one we have accomplished. Bad Samaritans is written with a kind of smug certainty that is, paradoxically, reminiscent of precisely the neoliberal triumphalism that it's written against. What's missing is a recognition of how mysterious the secret of economic growth remains, despite all the energy that economists have poured into solving it. Chang may know the answer—the rest of us will have to keep looking.

James Surowiecki writes the Financial Page column for the New Yorker.